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Introduction
SPHA511, John Ries
Introduction
Goal of course: Analyze the role of government
in private enterprise economies such as
Canada.
• Under what circumstances should a government
regulate or modify private enterprise and private
markets in order to improve economic efficiency or
social equity?
• What considerations actually influence governments to
intervene in private markets, and how have they done
so in the past?
• What are the effects of government intervention?
Introduction
Normative versus positive analysis
Normative analysis asks the question:
“What role should the government play in
the economy?”
Introduction
What are the goals of government?
•
•
•
•
economic efficiency and growth
macroeconomic stability
fairness
other social objectives: the promotion of
ethics, multiculturalism, Canadian
culture, etc
Introduction
Positive analysis asks the question:
“What explains the actual policies
adopted by government?"
Government may act in ways that do
not promote public interests due to
special interest groups or self-serving
bureaucrats
How well do you know Canada?
1.What was the Canadian population in 2007? What percent of the population in 2006 was born
outside Canada?
2. What percent of the female population 25-54 was in the labour force in 2006?
3. What percent of the 25-64 population held a bachelor's degree or higher in 2006?
4. What percent of the Canadian population was 65 years of age or older in age in 2007?
Between 50 and 64?
5. What were the unemployment rate, inflation rate in 2007?
6. What is Canada’s world rank in terms of per capita income? Who is highest?
7. Which provinces had the highest and lowest unemployment rates in 2007?
8. What was total government spending relative to GDP in 2007?
9. What is the total (federal and provincial) government deficit in 2007-8? What government’s
primary source of revenue? Primary expenditure items?
10. What is the largest industrial sector in Canada in 2007 in terms of employment: 1)
manufacturing 2) trade 3) agriculture and fishing, 3) forestry, fishing, mining, oil & gas , 4)
health care and social assistance or 5) finance and insurance? In terms of GDP?
11. What percent of manufacturing sales in Canada are accounted for by foreign controlled
firms?
12. What are Canada’s leading imports, exports?
13. What percent of Canadian GDP was exported in 2007? What was the U.S. share of Canadian
exports in that year?
Immigrant Population
Canada (2006)
Total - Place of birth
United States
Central and South America
Caribbean and Bermuda
Europe
United Kingdom
Other Northern and Western Europe
Eastern Europe
Southern Europe
Africa
Asia and the Middle East
West Central Asia and the Middle East
Eastern Asia
Southeast Asia
Southern Asia
and other countries
Number
6,186,950
250,535
381,165
317,765
2,278,345
579,625
489,540
511,095
698,080
374,565
2,525,160
370,515
874,370
560,995
719,275
59,410
Macroeconomic Indicators, Canada 1980-2006
25
Unemployment rate
20
Inflation rate
Interest rate
15
10
5
06
20
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
19
80
0
PPP
Total Tax as % GDP
Sweden
54.2% of GDP
Belgium
45.6% of GDP
France
45.3% of GDP
Italy
42.0% of GDP
Netherlands
41.4% of GDP
Norway
40.3% of GDP
Germany
37.9% of GDP
United Kingdom
37.4% of GDP
Canada
35.8% of GDP
Switzerland
35.7% of GDP
New Zealand
35.1% of GDP
Australia
31.5% of GDP
Ireland
31.1% of GDP
United States
29.6% of GDP
Japan
27.1% of GDP
Consolidated federal, provincial, territorial and local government revenue
2004
2005
2006
2007
2008
$ millions
Revenue
Personal income
taxes
Corporation income
taxes
Property and related
taxes
Consumption taxes
Health insurance
premiums
Sales of goods and
services
Investment income
Other revenue from
own sources
468,557
499,676
531,137
561,187
590,718
145,324
155,136
167,409
180,034
193,491
38,925
46,928
50,893
58,240
65,995
44,244
46,721
49,404
51,220
52,993
98,918
104,495
107,844
105,396
111,461
3,132
3,206
3,258
3,268
3,424
39,130
41,275
42,869
45,938
48,278
35,984
38,600
45,341
47,748
47,791
9,946
7,950
5,950
6,823
3,916
Consolidated federal, provincial, territorial and local government expenditures
2004
2005
2006
2007
2008
$ millions
Expenditures
General government services
Protection of persons and
property
Transportation and
communications
Health
Social services
Education
Resource conservation and
industrial development
Environment
Recreation and culture
Debt charges
Surplus or deficit
474,712
487,365
513,957
543,541
574,070
18,633
18,792
19,796
20,612
21,110
39,154
41,096
43,534
46,752
49,125
20,258
21,172
24,723
25,913
29,516
89,479
94,497
99,126
106,919
115,358
121,058
125,372
131,543
139,183
147,659
74,246
77,140
82,685
86,837
91,144
19,430
18,652
19,754
20,978
21,379
11,391
11,903
12,935
14,464
16,082
13,143
13,476
14,207
14,891
15,880
49,514
47,686
46,940
47,832
47,281
-6,156
12,312
17,180
17,647
16,648
Employment by industry
2003
2004
2005
2006
2007
thousands
All industries
15,672.3
15,947.0
16,169.7
16,484.3
16,866.4
332.4
326
343.7
346.4
337.2
281.6
286.6
306.4
330.1
339.3
906
951.7
1,019.50
1,069.7
1,133.5
2,275.2
2,292.1
2,207.4
2,117.7
2,044.9
2,467.8
2,507.1
2,574.6
2,633.5
2,682.4
917.0
960.6
987.8
1,040.5
1,060.4
1,003.6
1,018.3
1,050.0
1,089.9
1,136.9
1,027.1
1,035.7
1,106.1
1,158.4
1,183.2
1,679.2
1,733.4
1,734.6
1,785.5
1,846.1
1,005.5
1,012.4
1,004.5
1,015.0
1,069.4
819.0
825.5
833.1
837.4
864.6
Agriculture
Forestry, fishing, mining, oil and gas
Construction
Manufacturing
Trade
Finance, insurance, real estate and
leasing
Professional, scientific and technical
services
Educational services
Health care and social assistance
Accommodation and food services
Public administration
Canadian Trade ($cdn billion)
2003
2004
2005
2006
2007
399.1
429.0
450.1
453.7
463.1
Agricultural and fishing products 29.2
30.7
30.1
31.2
34.4
Energy products
60.5
68.1
87.0
86.8
91.6
Forestry products
34.5
39.4
36.4
33.3
29.3
Industrial goods and materials
66.8
78.0
84.0
93.9
104.4
Machinery and equipment
88.7
91.1
93.0
93.3
93.4
Automotive products
87.4
90.4
88.0
82.3
77.3
2003
2004
2005
2006
2007
342.7
363.2
387.8
404.3
415.0
Agricultural and fishing products 21.5
21.4
22.0
23.5
25.5
Energy products
19.8
24.8
33.7
34.6
36.6
Forestry products
3.0
3.2
3.1
3.1
3.0
Industrial goods and materials
65.3
73.5
78.6
84.0
85.1
Machinery and equipment
98.7
104.1
110.9
114.7
116.6
Automotive products
76.5
77.4
78.4
79.8
80.0
Exports
Imports
Canada
Exports
(billion $US)
U.S.
2003
2004
2005
2006
2007
UK
China
Japan
Mexico
Netherlands
326.7
6.1
4.8
8.2
2.2
1.6
348.1
7.7
6.8
8.6
3.1
1.9
365.8
8.3
7.1
9.2
3.4
2.2
359.3
10.1
7.7
9.4
4.4
3.1
356.0
12.8
9.3
9.2
5.0
4.0
Total
381.1
412.3
436.3
440.3
450.4
Canada
Imports
(billion $US)
2003
2004
2005
2006
2007
U.S.
203.8
209.0
215.2
217.6
220.5
China
18.6
24.1
29.5
34.5
38.3
Mexico
12.2
13.4
14.6
16.0
17.2
Japan
13.8
13.5
14.8
15.3
15.5
Germany
8.6
9.4
10.3
11.1
11.5
UK
9.2
9.7
10.4
10.9
11.5
336.1
355.9
380.9
396.6
406.7
Total
Merchandise Trade, 2005, $US billions
Exports
1054.3
970.7
Imports
960.8
774.1
Balance
93.6
196.6
USA
Japan
France
904.3
595.8
459.2
1732.7
516.1
495.8
-828.4
79.7
-36.5
Netherlands
Great Britain
Italy
Canada
401.3
377.9
366.8
359.6
357.9
501.2
379.7
320.1
43.5
-123.4
-12.9
39.5
Belgium
329.7
320.4
9.3
China (incl. HK)
Germany
Useful Economic Concepts
1. Opportunity Cost
Definition: "the opportunity cost of any action is the
value of the next most valuable action forgone"
2. Incentive Effects
Individuals respond to economic incentives.
Policies may have unintended consequences
because they alter the incentives of individuals
Useful Economic Concepts
Activity
• What is the opportunity cost of attending
this MHA program? Use the formula for
the present value of an annuity—
PV=A[1-1/(1+i)n]/i, where A is an annual
payment, i=0.05 is the interest rate, and
n=30 is the number of years working, to
solve for the additional income (A)
necessary to justify your decision given
your opportunity cost (PV).
Incentive effects
• Identify adverse incentive effects
associated with
– high marginal income tax rates
– generous unemployment insurance
– free healthcare
• What healthcare policies (pay schemes,
etc.) result in adverse incentive effects?
• What is a negative income tax?
Useful Economic Concepts
3. Marginalism
• The paradox of value (water is cheaper than
diamonds): Clearly, water is more important to
people than are diamonds, yet diamonds are
much more expensive. Why?
• Prices reflect marginal value.
Prices are determined on the
margin
P
SD
PD
SW
PW
DD
DW
Q
Useful Economic Concepts
• It is important not to confuse the total value of an
activity with the marginal value of increasing the
activity. Just because health care is more
important than parks does not mean funding
should be increased on healthcare at the
expense of parks.
• Marginalist principle: any policy or action should
be undertaken only if the incremental or
"marginal" benefit exceeds the marginal
opportunity cost.
Useful Economic Concepts
4. Efficiency
Efficiency relates to two questions: Is a given level of
output being produced at lowest cost? Is the right level
of output being produced?
• (1) production efficiency is attained when a firm is
managed so that total costs are minimized for a given level
of output. This is exactly equivalent to saying that the
maximum amount of output is being produced from a given
level of inputs.
• (2) allocational efficiency is attained when it is impossible
to re-allocate the resources among a group of people in
such a way as to make at least one person better off
without making anybody else worse off. Allocational
efficiency is also known as "Pareto-efficiency”.
Useful Economic Concepts
A Pareto improvement occurs when at least one person is
made better off while no one is made worse off. Similarly,
a potential Pareto-improvement is said to exist if a reallocation of resources allows those individuals who are
net gainers to (hypothetically) fully compensate the net
losers, and still be better off.
Genuine Pareto-improvements are rare in practice, often
the best we can hope for often is that a particular policy is
a potential Pareto-improvement, which leaves open the
question of whether gainers actually compensate losers.
Health care funding and efficiency
There are three ways to potentially increase
efficiency in health care
(1) Improve production efficiency—combine
resources better in order to deliver more output
$
S=MC
S’=MC’
b
a
D=MB
Q
Health care funding and efficiency
(2) Increase the healthcare budget if marginal
benefits exceed marginal costs of additional
supply.
S
S=MC
D=MB
Q0
Q*
Quantity
Health care funding and efficiency
(3) Within the healthcare budget, reallocate funds
away from areas with low marginal benefits and
towards those with high marginal benefits
$
MBp
MBs
A0
A*
Total budget